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What Happened to Cash-King?
Dell's Slap on the Wrist
Is there a bigger hit coming?
by Al Levit (firstname.lastname@example.org)
GLENDALE, CA (Dec. 17, 1998) -- These last few weeks have certainly been an exciting time for stock market investors. We've gone through one of the briefest bear markets in history. The Rule Maker Portfolio is back at an all-time high for the year, and thus an all-time hire for its life, after being underwater only two months ago.
Some great things have been happening with the Rule Maker stocks lately. For example, The Gap (NYSE: GPS) just turned in a dynamite quarter and Microsoft (Nasdaq: MSFT) has had some typical good news recently as well. I had a few things to say about Microsoft four weeks ago, and I'll be examining the company a little further tomorrow in light of the recently announced deal between America Online (NYSE: AOL), Netscape (Nasdaq: NSCP), and Sun Microsystems (Nasdaq: SUNW).
Today, however, I want to write about a great thing that happened last month to Dell Computer (Nasdaq: DELL), which is one of the premier Market-Kings. I've written about Dell before, and I undoubtedly will write about the company again. For the record, I own a significant number of Dell shares (significant to me, not to Dell!).
At any rate, Dell released its earnings for the third quarter of fiscal year 1999 on November 12. In many ways, the quarterly statement was typical:
- Earnings per share were $0.28, up 65% from the prior year, and a penny ahead of consensus expectations
- Earnings were up 65% from the prior year
- Revenue was up 51% from the prior year
- Operating income was up 56% from the prior year
- Net income was up 55% from the prior year
- Gross margin remained level at 22.5% from the prior year
- Operating margin rose to a record 11.2% from 10.9% in the prior year
- The balance sheet remained sterling:
- Cash and Marketable Securities were 546% of debt (511% of debt in the prior quarter; no debt in the prior year)
- The Flow ratio was 0.85 (1.12 in the prior quarter; 0.84 in the prior year)
Also typical for Dell were a few "extra little goodies" that accompanied the numbers:
- Dell is in the No. 1 position of profitability in the computer system industry. It was also No. 1 in revenue and unit shipment among the top 10 computer systems companies, growing at more than five times the industry rate.
- Dell repurchased 18 million shares during the quarter, and has repurchased 360 million shares since its share repurchase program started in 1996.
- Dell grew profitably in the Asia-Pacific region including Japan, achieving revenue growth of 49% when the overall industry grew at only 2% in the region.
- Dell's return on invested capital of 190% once again led the industry.
I found this report to be very impressive. It showed that the company was continuing to perform to the same high standard it had been achieving in the past. The market, on the other hand, seemed to have other ideas, because the price of Dell's stock dropped about 10% after the earnings report was released, and it hasn't really recovered since then.
Many reasons have been posited for why Dell's stock would behave in such a peculiar fashion. My personal feeling is that two factors are involved:
- The stock price rose at least five or six points in the days immediately prior to the earnings release. Many people were hoping that Dell would release earnings significantly HIGHER than consensus estimates. When this didn't happen, these speculators sold and the stock price dropped back.
- Even though the growth numbers shown above are very high, they are actually a little lower than the growth that Dell has shown in previous quarters. For example, Dell's revenue growth increased 58% from the third quarter of fiscal 1997 to the third quarter of fiscal 1998.
I think that this second factor is key. If I'm right, and the price of Dell's stock dropped because some investors see a decline in Dell's future growth, then there may be a lot less risk for a new investment in Dell going forward than there has been in the past. I've written before that I was afraid of "the hit" that Dell would take when investors saw that its growth was slowing. I was afraid it might be a pretty hard spanking. In fact, it's beginning to look like Dell is taking that hit right now, and it's a lot more like a little slap on the wrist.
Time will tell whether or not I'm right on this. The neat part is that if I am, Dell will remain a Market-King, but I won't have to spend anymore time worrying about managing Dell than I would any Rule Maker in my portfolio. If that's true, then Dell will be as much a "core holding" of my personal portfolio as Cisco (Nasdaq: CSCO) and Microsoft (and you don't get more core than that!).
That's it for today. Tomorrow, I'll look at whether poor, little Microsoft stands a chance against the AOL/ Netscape/ Sun Oligopoly. Until then, Fool on.
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|Rule Maker Portfolio Archives »|
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Stock Change Bid AXP +5 1/8 98.63 CHV -1 5/16 82.81 CSCO +2 3/16 84.88 KO --- 64.88 GPS - 5/16 47.94 EK + 3/8 73.44 XON - 7/8 74.88 GM +1 15/16 72.00 INTC +2 3/4 116.88 MSFT + 5/8 134.38 PFE +1 1/8 116.88 SGP - 7/8 53.81 TROW +1 1/4 34.25
Day Month Year History R-MAKER +1.05% 2.51% 24.81% 24.81% S&P: +1.55% 1.40% 17.29% 17.29% NASDAQ: +1.72% 4.84% 22.66% 22.66% Rule Maker Stocks Rec'd # Security In At Now Change 2/3/98 24 Microsoft 78.27 134.38 71.68% 6/23/98 34 Cisco Syst 58.41 84.88 45.31% 2/3/98 22 Pfizer 82.30 116.88 42.01% 5/1/98 55.5 Gap Inc. 34.06 47.94 40.74% 2/13/98 22 Intel 84.67 116.88 38.03% 8/21/98 44 Schering-P 47.99 53.81 12.13% 2/6/98 56 T. Rowe Pr 33.67 34.25 1.71% 5/26/98 18 AmExpress 104.07 98.63 -5.23% 2/27/98 27 Coca-Cola 69.11 64.88 -6.12% Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 64.34 74.88 16.38% 3/12/98 20 Eastman Ko 63.15 73.44 16.30% 3/12/98 17 General Mo 72.41 72.00 -0.56% 3/12/98 15 Chevron 83.34 82.81 -0.64% Rule Maker Stocks Rec'd # Security In At Value Change 2/3/98 24 Microsoft 1878.45 3225.00 $1346.55 6/23/98 34 Cisco Syst 1985.95 2885.75 $899.80 5/1/98 55.5 Gap Inc. 1890.33 2660.53 $770.20 2/3/98 22 Pfizer 1810.58 2571.25 $760.67 2/13/98 22 Intel 1862.83 2571.25 $708.42 8/21/98 44 Schering-P 2111.7 2367.75 $256.05 2/6/98 56 T. Rowe Pr 1885.70 1918.00 $32.30 5/26/98 18 AmExpress 1873.20 1775.25 -$97.95 2/27/98 27 Coca-Cola 1865.89 1751.63 -$114.27 Foolish Four Stocks Rec'd # Security In At Value Change 3/12/98 20 Exxon 1286.70 1497.50 $210.80 3/12/98 20 Eastman Ko 1262.95 1468.75 $205.80 3/12/98 17 General Mo 1230.89 1224.00 -$6.89 3/12/98 15 Chevron 1250.14 1242.19 -$7.95 CASH $120.62 TOTAL $27279.46 *Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.
*The year for the S&P and Nasdaq is as of 02/03/98
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